Mark Zuckerberg, Facebook Inc and Banks Must Face IPO Lawsuit, Says Judge

Federal judge accuses social media company of misleading investors about its health before its $16bn May 2012 IPOю

The Facebook initial public offering took place in May 2012. Photo: skynetcusco/ Flickr

A federal judge stated that Facebook Inc and its CEO Mark Zuckerberg, as well as several banks must face a lawsuit over alleged misleading investors about its financial condition before its $16 billion initial public offering last year.

On Wednesday, US district judge Robert Sweet in Manhattan claimed that investors could pursue claims that Facebook should have revealed the information about the possibility of revenue decline because of the increased mobile usage and product decisions.

“The company’s purported risk warnings misleadingly represented that this revenue cut was merely possible when, in fact, it had already materialized,” Sweet wrote in his 83-page decision. “Plaintiffs have sufficiently pleaded material misrepresentation(s) that could have and did mislead investors regarding the company’s future and current revenues.”

Facebook released a statement that said: “We continue to believe this suit lacks merit and look forward to a full airing of the facts.” However, a spokeswoman for Menlo Park, California-based Facebook had no immediate comment.

First the social media company went public at $38 per share and during the first day of trading its share price rose as high as $45, but quickly fell below the offering price and stayed there for more than a year.

According to the investors including, such as pension funds in Arkansas, California and North Carolina, California-based company concealed material information from its IPO registration statement that it had provided to its underwriters’ analysts, reports the Reuters news agency.

The lawsuit does not allege fraud. More than 40 defendants were sued, including Facebook chief operating officer Sheryl Sandberg, lead underwriter Morgan Stanley, Goldman Sachs Group Inc and JPMorgan Chase & Co.

On Monday, Judge Sweet issued a decision that investors could also pursue claims accusing Nasdaq OMX Group Inc of concealing technology problems that led to difficulties in processing trades on May 18, 2012 – Facebook’s first day of trading. Joseph Christinat, a Nasdaq spokesman, declined to comment on the decision, which is dated Dec. 12.

In a 97-page decision, Judge Robert Sweet agreed that SRO status gave Nasdaq immunity from some claims, including the decision not to halt the IPO, although  he rejected Nasdaq’s effort to dismiss claims over the design and testing of its systems, including that it allegedly knew its advertised “on-time, on-target and ready-to-launch” had not undergone the “stress tests” needed to ensure it was up to handling trading in Facebook , reports The Economic Times.

“Once this testing revealed inadequacies and flaws in light of the upcoming largest IPO in Nasdaq history, Nasdaq had a duty to correct its prior statements as to its capabilities,” the judge wrote. “Nasdaq’s failure to correct flawed information about its technology capabilities could have impacted plaintiffs’ decision to participate in Facebook’s offering and ability to trade during that offering.”

Facebook is now profitable, and is expected to join the Standard & Poor’s 500 index after the close of trading on Friday. In Monday trading, Facebook shares closed up 49 cents at $53.81, and Nasdaq shares rose 17 cents to $38.72.

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